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On October 6, 2017, FERC rejected without prejudice Southwest Power Pool’s (“SPP”) proposed tariff revisions and a cost sharing agreement related to two transmission projects with Associated Electric Cooperative (“AECI”), a rural electric cooperative that has member cooperatives in Missouri, Iowa, and Oklahoma, and City Utilities of Springfield, Missouri (“City Utilities”), a non-public utility that is a transmission-owning member of SPP. AECI is not a member of SPP. The Commission found that SPP’s proposal did not allocate the costs of the proposed transmission projects to its beneficiaries in a “roughly commensurate” manner. For this reason, the Commission rejected SPP’s tariff revisions and cost sharing agreement without prejudice. FERC’s action is notable in that cross-border projects have been few and far between in the post-Order 1000 world of transmission planning, and the Commission might be expected to tout the success of its planning initiatives. The Commission nonetheless found the cost allocation proposals to have serious shortcomings.

The contemplated transmission projects intended to address persistent thermal and voltage problems along the seam of SPP and AECI’s systems. The proposed projects would add a new 345/161 kV transformer at AECI’s Morgan Substation and uprate AECI’s existing 161 kV Morgan to Brookline transmission line (collectively, the “Morgan Transformer Project”). Additionally, SPP proposed a new 345 kV 50 MVAR reactor at the existing Brookline substation owned by City Utilities (the “Brookline Reactor Project”). In its filing, SPP indicated that the Morgan Transformer Project, which would be located entirely within AECI’s footprint, would cost an estimated $13.75 million, and the Brookline Reactor Project, located within the SPP footprint, would cost an estimated $5 million. To allocate shares of these costs, SPP requested that the Commission accept its proposal to establish a cost-sharing and usage agreement among SPP, AECI, and City Utilities, in addition to revisions to SPP’s tariff, which would reflect SPP’s negotiated share of the revenue requirements.

Under the cost sharing agreement, SPP agreed to pay 89.1% of the Morgan Transformer Project’s costs, while AECI agreed to bear the remaining costs. According to the cost sharing agreement, the costs of the Morgan Transformer Project would be calculated using the final costs of the project, multiplied by a 16% levelized carrying charge annually over the service life of the facilities. For the Brookline Reactor Project, SPP agreed in the cost sharing agreement to pay 97% of the project’s costs, while AECI agreed to pay the remaining 3%. SPP proposed to allocate its share of the costs of both of these projects by inserting the revenue requirements for the project into the annual transmission revenue requirement of its Highway/Byway cost allocation methodology, which is spread amongst all SPP members on a load-ratio share basis.

Xcel Energy Service Company (“Xcel”) protested the cost allocation for the Morgan Transformer Project, and Westar Energy, Inc. (“Westar”) protested the alleged lack of transparency surrounding the cost allocation negotiations for both projects. Xcel contended that SPP provided insufficient evidence that the proposed cost allocation for the Morgan Transformer Project is roughly commensurate with the benefits that the project will provide to the SPP region. Xcel also argued that “there is no default rule that all customers in SPP should bear the costs of a transmission facility in cases where the owner of the facility is located outside of SPP.” Xcel also contended that City Utilities would receive over 60% of the benefits from this particular project while only contributing 1.6% of the costs, given its load-ratio share. Westar’s comments also noted that SPP had not provided benefit-to-cost ratios for either project and, therefore, it was not possible for FERC or any party to determine whether the proposed cost allocations were just and reasonable.

FERC concluded that SPP’s proposed cost allocation and tariff revisions were unjust and unreasonable and unduly discriminatory or preferential. FERC reasoned that SPP failed to demonstrate that the costs of these projects were allocated to beneficiaries in a “roughly commensurate manner.” FERC agreed with Xcel that SPP had failed to provide sufficient evidence of the benefits to the SPP region of the Morgan Transformer Project, particularly including a lack of demonstrated benefits throughout the SPP region such that allocation of costs on a region-wide, load-ratio share basis was inappropriate. FERC found similar fault with the evidence SPP provided for the Brookline Reactor Project. The Commission therefore rejected the proposed cost sharing agreement and tariff revisions without prejudice, indicating that SPP could propose an alternative allocation of costs that meets FERC’s requirement that costs be “roughly commensurate” with benefits received.

The order addressing the cost sharing agreement and SPP’s proposed tariff revisions can be found here.

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